Saturday, May 8, 2010

'Why are you a conservative?' I get asked this question many times. Its usually phrased "Aren't you to young to be a conservative?" The short answer is no. The rest of this post will be giving the long answer.

Government sucks.

A good friend of mine once asked me 'why am I against taxes? Why not just elect representatives who would do what you want?' My answer is that the government has yet to prove its efficacy in ANYTHING. Everything that the government is in control of, has failed, while everything that the government has let go of, succeeds with flying colors. Speaking of flying colors, airline regulations were in place until 1978. Up until that point, service was terrible, prices were high, and safety was nonexistent. With the advent of airline deregulation all of that changed. The airplanes were more punctual, the prices fell to 40% (in real dollars) of what it was preceding airline regulation, and the number of fatal accidents per year fell by almost half [1]

This story is by no means atypical. For example the telephone industry [2] also had similar increases in quality and decreases in pricing when the government removed regulation.

Allow me to preempt the very obvious question, what about finance? Yes I admit, that with the deregulation of the finance system, companies were more likely to invest in things they had no business investing in, but that is not the issue as I see it. If they were stupid enough to invest in terrible assets, then why don't we let them face the repercussions of their actions? Too big to fail is unconvincing at best. I am a fan of capitalism, not big business, and a major part of capitalism is that those who do stupid things are kicked out of the market. The fact that the government's deregulation made it easier to be stupid, has nothing to do with the merits of the government.

Actually, I can use this argument to even help my case. If you were to look at the instigators of this crash, subprime mortgages, you would realize what REALLY started this. Fannie Mae and Freddie Mac, unlike all other companies subjected to the free market, are government sponsored enterprises who's job was to give loans to the less fortunate, aka subprime loans. Republicans argued to weaken the amount of government power of this organization, but were accused of unfair play by democrats.

Here's a little mind experiment for you. Remember the last time you stood in a really long line (...that wasn't in Disney)? Chances are it was in a government owned building. The DMV and the post office are all examples of inefficiencies instituted by the government. The post office is unable to economically support itself [3] and the DMV's lines are miserably wrong.

Friday, May 7, 2010

One more reason to love the free market: it ends racism. Does this sound ridiculous? Probably at first but hear me out. I just read Economic Facts and Fallacies by Thomas Sowell which addresses this very issue. Its an excellent read that deals with many of the misconceptions associated with the free market, but by far my favorite part was when he addressed how the free markets solve the problem of racism.

There is some confusion in dealing with labor in the market, but what's important to realize is that labor is just like any other product that is bought and sold on the market. Let's assume that we have an economy with two groups of people: purple and green. We'll also assume that both the purple and the green people have the same qualifications so that the labor of purple people and green people are substitute goods. Let's also assume that we have two employers who make cars, one who is racist against green people and one who is indifferent. The racist employer is willing to go out of his way and discriminate against the green people in hiring. We'll also assume that the market set the wages of both groups of people at the same wage, $8/hr.

Some of you sharp Microeconomics AP students will realize exactly what this is. This is a change in consumer tastes. If a portion of the consumers, employers in this case, believe that a given product is worse than another product, then regardless of the truth of that statement, the 'worse' product will be cheapened while the 'better' one will be made more expensive. Now because the racist manager has increased the demand for the labor of purple people and decreased the demand for the labor of green people, the wage of the purple people move up from $8/hr to $9/hr, while the wage of the green people fell from $8/hr to $7/hr. Now we have an employer who only hires purple people at $9/hr while the other one, reacting to the drop in the wage of the green people, hires only green people at $7/hr. The employer who only hired green people now has lower costs then the purple manager and is thus able to sell cars at a lower cost to the market. The market, which doesn't have any way of differentiating between cars except by pricing, then chooses only to buy goods from the non-racist employer, while the other employer is priced out of the market to be replaced by another. If the other employer is racist then the cycle continues until all of the successful employers do not differentiate between races and then the market equalizes all wages to $8/hr once again.

This works fine, unless there is a minimum wage. Let's say for practical purposes the government set the minimum wage at $9/hr. Now there is no longer the cost to being racist. Instead of there being a price difference between the cars produced the prices are the same, and the racist employers do just as well economically as the indifferent one's. Sounds real good in theory, right? The question then becomes does this bare out in practice.

The most convincing example of this in the book involved the country of South Africa. During apartheid, the government essentially enforced racism. There were laws on the books that required construction crews to have a certain minimum ratio of whites to blacks. This caused a significant drop in the wages of blacks as the demand for their labor decreased. The most successful foremen, who were able to outbid the more expensive companies, were those who violated this law and hired an 'unacceptable' ratio of blacks to whites. They were fined, but continued to do so anyways which meant that even with a cost associated with indifference, it was still better for them to hire more blacks than legally allowed.

To conclude, the free market solves the problem of racism, while price controls, like the minimum wage, allow people to indulge their prejudices at no cost to them.